Commentary, COVID-19, NC Budget and Tax Center

Big falloff in revenues dictates an obvious course for state leaders

As economic projections worsen across the country, the outlook on state budget shortfalls is equally bleak. While there is still much we don’t know, North Carolina’s fiscal picture is now a little clearer with the release of the state’s first revenue forecast since the start of the COVID-19 pandemic.

Last week’s consensus revenue forecast expects revenue collections to be down $4.2 billion –  $1.6 billion (6.6%) this fiscal year and $2.6 billion (9.9%) next year. That means fewer public resources at a time of growing demand for services and supports. Without additional revenue, $1.6 billion less in North Carolina’s General Fund is equivalent to the total state funding currently allotted to the Community College System plus NC State University, combined. Next year, a $2.6 billion hit would be equivalent to the entire state allocation for Justice and Public Safety.

State economists have repeatedly emphasized the unprecedented and uncertain nature of the current crisis. There will not be a final account of state revenue until after the new tax filing deadline, which was pushed back from April 15 to July 15. But economic indicators, such as skyrocketing unemployment and plummeting GDP, suggest that this recession could be deeper and longer than any in modern history.

Unfortunately, as the chart indicates, North Carolina’s current fiscal position has been hampered by past policy choices that provided tax breaks for the wealthy at the expense of everyone else.

The state is estimated to currently collect $3.6 billion less per year than it would had lawmakers not enacted the tax cuts that commenced in 2013. Starting this downturn from a diminished level of revenue collection means our public institutions were already under-resourced and unable to fully meet people’s basic needs, long before our current public health and economic crisis began.

The latest revenue forecast paints a troubling picture of state finances and points to the urgent need for additional and flexible federal aid to state and local governments. According to U.S. Treasury guidance, federal funding cannot be used to cover revenue shortfalls, and it must be received by recipients by the end of 2020 and spent on COVID-related expenses incurred before the new year.

A recent proposal passed by the U.S. House would provide critical aid to state and local governments, with estimates suggesting it would deliver about $6.8 billion in state aid to North Carolina and more than $11 billion to the state’s local governments.

Without additional federal funds or state revenue, budget cuts could cause thousands of people to lose access to public resources and services at a time during which they need them most. North Carolina’s leaders should act quickly by asking the federal government for more flexible state aid and requiring companies that have profited from the pandemic – like big banks and online retail giants – to pay their fair share in state taxes.

Building a more vibrant and inclusive economy will depend on thoughtful fiscal policies that put people before profits.

Leila Pedersen is a policy analyst at the N.C. Budget & Tax Center.

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